Hedge fund performance during the first half of May was fuelled by CTAs and L/S Equity strategies, while Event-Driven continued to underperform, according to the Latest Weekly Brief from Lyxor’s Cross Asset Research team.
On the Lyxor platform, Merger Arbitrage strategies have nonetheless started to recover while Global Macro strategies outperformed on the back of their long USD and long energy positions in the commodity space.
On a year-to-date basis, L/S Equity and Relative Value Arbitrage continue to outperform, while special situations strategies underperform on the back of their elevated market beta and exposures to defensive sectors such as communications and health care which underperformed both in the US and in Europe.
L/S Equity Market Neutral has been attractive thus far in 2018 to protect portfolios. Their usual sensitivity to momentum stocks has been buoyed by the rally of this risk factor. Lyxor writes: “While we have been defensive on the strategy at the beginning of 2018 due to its vulnerability to sector/ factor rotations, we have upgraded the strategy back in March to Neutral.
“Actually, the momentum risk factor is heavily geared towards IT stocks at present, which, in our view, maintain strong appeal (low sensitivity to rises in bond yields, strong earnings growth expectations, tax reform boosting capex, etc).
“The strategy has also been buoyed by the rally in quality stocks, which also appear to be attractive at times of rising bond yields. Quality stocks typically include companies with higher equity to debt ratios.
“Merger Arbitrage has underperformed so far in 2018 and in Q2. Yet, we believe the strategy remains highly attractive for portfolio diversification purposes, especially if the volatility regime stays elevated.
We maintain strong convictions on the strategy for several reasons: i) it currently benefits from elevated deal spreads, at 5.3 per cent in the US versus 4.7 per cent on average since July 2016; ii) strong M&A volumes on both sides of the Atlantic help merger arbitrageurs building diversified portfolios; iii) the strategy has historically been resilient in turbulent markets. The strategy has outperformed other hedge fund strategies in February and March when implied volatility on risk assets jumped significantly.
“On a negative note, the strategy tends to be negatively impacted by rising bond yields. While we have been bearish on bonds, we believe there is limited upside for 10Y Treasuries compared to current levels (3.1 per cent).”
